What are pre-emption rights ?
The most common entitlements for pre-emption are a pro rata right for existing shareholdings but subject to the number of shares taken up by the other shareholders. A key point is that pre-emption rights ensure that all existing shareholders have an opportunity to prevent their stake being diluted by new issues.
Shareholders do not have to take up their pre-emption rights and often refuse where the new shares on offer are perceived to be too expensive.
Pre-emption rights do not apply to the sale of treasury shares (which were introduced by the 2006 Companies Act) because transactions in treasury shares may not lead to dilution of holdings
The default position under company law now is for private limited companies under The Companies Act 2006 (CA) is that a company proposing to allot new shares may not allot them for cash unless they have previously offered them on the same or more favourable terms to the other shareholders. These pre-emption rights can be disapplied but a procedure needs to be followed and remember that this default right relates to the issue of new shares and not the situation where for example, an existing shareholder wants to sell his, her, their existing shares.
Relevant shares mean all the shares in the company except:
• Shares of a different class, e.g a proposed allotment of Ordinary Shares will not trigger pre-emption rights in Preference shareholders
• Shares allotted (or to be allotted) under an employees’ share scheme
Disapplication of pre-emption rights
A company can disapply the pre-emption rights of existing shareholders in relation to either a specified allotment or to allotments generally by passing a special resolution of the members in general meeting. The resolution must be proposed to the members, with sufficient notice, by the directors who must give reasons for their recommendation, the price for the shares being allotted and the directors’ reasons for determining that price
It is unusual for a company by way of a general meeting to disapply pre-emption rights in relation to specific allotments of shares. Instead, it is more usual for company directors to be granted general authority to allot shares. A company can, under company law, overrule the provisions of the Companies Act detailed above. However, it is vital that any decision to disapply is be contained in the articles of association of the company or clearly and specifically authorised by way of a special resolution, failing which shareholders rightsmay be breached and the directors could find themselves possibly liable.
Stock Exchange requirements relating to pre-emption rights
A listed company intending to issue shares must comply with specific rules on pre-emption. For more information on this, commercial law solicitors should really be consulted as the rules are technical.